My Humble House Hospitality Management Consulting's (TWSE:2739) Performance Is Even Better Than Its Earnings Suggest

My Humble House Hospitality Management Consulting Co., Ltd. (TWSE:2739) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for My Humble House Hospitality Management Consulting

Zooming In On My Humble House Hospitality Management Consulting's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2023, My Humble House Hospitality Management Consulting recorded an accrual ratio of -1.63. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$1.3b during the period, dwarfing its reported profit of NT$414.0m. My Humble House Hospitality Management Consulting shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Surprisingly, given My Humble House Hospitality Management Consulting's accrual ratio implied strong cash conversion, its paper profit was actually boosted by NT$158m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that My Humble House Hospitality Management Consulting's positive unusual items were quite significant relative to its profit in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On My Humble House Hospitality Management Consulting's Profit Performance

My Humble House Hospitality Management Consulting's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Given the contrasting considerations, we don't have a strong view as to whether My Humble House Hospitality Management Consulting's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about My Humble House Hospitality Management Consulting as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for My Humble House Hospitality Management Consulting you should be mindful of and 1 of them is a bit unpleasant.

Our examination of My Humble House Hospitality Management Consulting has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.